Tencent Holdings Ltd. is raising its stake in Ubisoft Entertainment SA in a deal that values France's biggest games developer at almost $10 billion, as deep-pocketed Chinese firms continue their overseas search for growth.
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Interest in the maker of the "Assassin's Creed" and "Tom Clancy's" franchises comes as the world's largest games firm by revenue counters slowing growth at home with purchases including 16.25% of Japan's "Elden Ring" developer FromSoftware announced just a week ago - the same time domestic rival NetEase Inc. said it would buy French games maker Quantic Dream.
The latest Tencent deal also caps a difficult four-year period at Ubisoft, where there has been a succession of new game delays and sexual harassment allegations that led to a revamp of top management. The firm's share price has dropped in that time from about 100 euros to less than 44 euros on Tuesday.
"Tencent is a key shareholder partner for many of the industry's leaders, who have created some of the most outstanding video games," said Ubisoft Chief Executive Officer Yves Guillemot. "This transaction reinforces our ability to create strong value over the coming years."
The transaction makes Tencent part of a shareholder pact with Ubisoft's founders, the Guillemots, and gives it a total stake in the games maker of over 11%. That pact involves Tencent's acquisition of 49.9% of Guillemot Brothers Limited with 5% voting rights, Ubisoft said in a statement.
Tencent's investment in Guillemot Brothers, which owns the bulk of the founding family's 15% Ubisoft stake, amounts to 300 million euros ($296 million) at an implied valuation of 80 euros per Ubisoft share. That values Ubisoft at over 10 billion euros.
China's largest social network and gaming firm also has the right to raise its direct stake in Ubisoft to 9.99% from 4.5% currently, said Ubisoft.
Reuters reported in early August, citing people with direct knowledge of the matter, that Tencent planned to raise its Ubisoft stake. The Chinese firm's share price fell about 2% on Wednesday morning in Hong Kong.
Tencent will not be able to sell its shares for five years, beyond which the Guillemot family will have a pre-emptive right to buy the shares, Ubisoft said. It also said Tencent pledged not to increase its direct stake in the French games maker beyond 9.99% in capital for a period of eight years.
Tencent, which bought its first 5% of Ubisoft for 66 euros per share in 2018, is also providing the Guillemot's holding with a long-term loan to refinance its debt, Ubisoft said.
The deal structure does not seem to be a change to the long-standing strategic partnership between the two firms, said Matthew Kanterman, director of research at Ball Metaverse Research Partners.
"Overall it's a bet by Tencent that Ubisoft can improve its execution and unlock value in its catalogue of intellectual property (IP), the pair can create new mobile games based on that IP and that they can bring existing Ubisoft titles into China once the regulatory climate improves," he said.
The deal will likely help Tencent offset pressure in its home market where the gaming regulator has not granted any new game licences to Tencent since June last year, analysts said.
Overall revenue in the world's biggest video game market declined for the first time in January-June, a report showed, as it continued to reel from increasing government oversight.
China began intense scrutiny of its high-growth tech sector around two years ago, in part alarmed by what regulators called "disorderly expansion of capital" caused by acquisition sprees.
Tencent last month reported its first ever quarterly revenue fall, partially hurt by a lack of game approvals and regulations that limit playing time.